Inland Revenue v Wimbledon Football Club Ltd & Ors

The first respondent, The Wimbledon Football Club Limited (“the Club”), is a professional football club, the holder of a share (“the Share”) in the Football League Limited (“the League”) and accordingly a member of the League. Membership of the League is a precondition of participation in its competitions. The Club was until the 9^th May of this year in Division 1 of the League’s Nationwide League but has now been relegated to Division 2. The Club is however hopelessly insolvent and on the 5^th June 2003 went into administration. Under the Articles of Association of the League (“the Articles”) and the document entitled “Current Insolvency Policy” (“the Policy”) published by the League, the administration gave rise to a right on the part of the League require the Club to transfer the Share to a person nominated by the League for a nominal consideration, and the administrators can only sell the Share and realise the Club’s undertaking at an advantageous price if under the terms of any sale agreement the purchaser agrees to pay certain specified non-preferential creditors in full and if the Club’s exit route from administration is a voluntary arrangement. The Club has entered into such a sale agreement (“the Sale Agreement”) and on the 18^th March 2004 a meeting of the Club’s creditors approved a voluntary arrangement (“the Arrangement”) under which all the net assets of the Club will be applied in payment to the preferential creditors of a dividend of 30 pence in the pound. Accordingly the applicants, the Commissioners of Inland Revenue (“the Revenue”), will receive 30 pence in the pound in respect of their preferential debt of £525,000. The second and third respondents are the supervisors of the Arrangement.

By an application under section 6 of the Insolvency Act 1986 (“the Act”) dated the 14^th April 2004 the Revenue applied for an order revoking or alternatively suspending the Arrangement on the grounds that the Arrangement unfairly prejudices the interests of the Revenue as a creditor and that there were material irregularities at or in relation to the creditors’ meeting, namely non-compliance with section 4(4)(a) of the Act. The complaint is that the non-preferential creditors will receive 100 pence in the pound whilst the Revenue who are preferential creditors will only receive 30 pence in the pound. By an order dated the 28^th April 2004, it was ordered that the hearing of the application be expedited and the application came on before me for hearing on the 6^th May 2004. I have expedited the preparation of this judgment.

The application raises questions of construction of section 6 and section 4(4)(a) of the Act on which I have received valuable assistance from both counsel.

Under the Articles the League has an authorised share capital of 100 shares of 5 pence each and 72 of the shares have been issued to Member Clubs. Member Clubs and only Member Clubs may play in the League’s matches. Article 4 provides that the Board of the League may serve on a Member Club a notice requiring it to transfer its share to such persons as it shall specify at the price of 5 pence (a notice referred to in the Articles and the Policy as a notice of withdrawal of membership and which I shall refer to as a “Notice”). The conditions on which the Board may serve the Notice (include amongst other events) the presentation of a petition or an order made against the Member Club for an administration order or the making of a winding up order. Article 4.8 provides that the Board shall have power to give the Notice suspended for a period and to impose such conditions on the Member Club as it decides and to withdraw the notice if “Football Creditors” (as defined) are paid in full or payment in full is secured and any other conditions are satisfied. Article 55 provides that the League shall keep an account called “the Pool Account” into which the income of the League (including television income) is paid and out of which payments are to be made as thereafter specified to Member Clubs. Article 70.1 authorises the Board to impose penalties on a Member Club if it defaults in making any payment due to any of 14 specified persons who are referred to as “Football Creditors”. The specified persons include any full time employee or ex-employee of the Member Club to whom there are due arrears of remuneration and any other Member Club. Article 70.2 requires the Board to apply any sums standing to the credit of a Member Club which is in default in making such payments in discharging debts due to Football Creditors.

The Policy sets out the policy which it follows in cases of insolvency of Member Clubs. In paragraph 4 the League draws the distinction between Football Creditors and other creditors, and states the principle that it is not tenable to allow a club to remain a Member Club if Football Creditors are not paid in full, but that a less strict approach is adopted if other creditors are not paid. Paragraph 3 (so far as material) reads as follows:

“EXIT FROM INSOLVENCY PROCEEDINGS

3.1

The Board will only withdraw the notice of withdrawal of membership given to a Member Club if:

3.1.1.

a Member Club has completed arrangements satisfactory to the Board for exit from the relevant insolvency proceedings; and

3.1.2.

all Football Creditors (as defined in Article 70.1) are paid in full, or payment in full is secured to the satisfaction of the Board; and

3.1.3.

all sums due to players or former players under the terms of their contracts are paid in full, or payment in full is secured to the satisfaction of the Board; and

3.1.4.

all sums due to other clubs not included in the definition of Football Creditors in Article 70.1 are paid in full at the insistence of the Football Association, UEFA or FIFA; and

3.1.5.

the Member Club (or the proposed new Member Club) provides projected trading and cash flow forecasts and confirmation of funding which indicate that it has sufficient resources to ensure that it can reasonably expect to complete its fixtures for (at least) the remainder of the Season and/or the following Season as appropriate; and

3.1.6.

any further conditions (which the Board reserves the right to impose at any time as in its absolute discretion deems appropriate) have been satisfied

3.2

Where the exit from the relevant insolvency proceedings involves the transfer of assets and the business of the Member Club to a new or another company, the Board will only register that company as a Member of the Football League provided that it complies, performs, observes and satisfies any conditions imposed by the Board. Save for exceptional circumstances, those conditions to be imposed by the Board are set out in Appendix IIA.

3.3

The Notice of Withdrawal of Membership will take effect immediately and without further notice if a Member Club passes a resolution for its winding up or has a winding up order made in respect of it any suspension of the Notice of Withdrawal of Membership will immediately come to an end.

3.4

Any exit route from formal insolvency proceedings should demonstrate that either creditors will be paid in full, or that creditors have approved proposals that compromise their debts and allow for the payments set out in Clause 3.1 herein to be paid in full. The Board will generally consider a Company Voluntary Arrangement under the Insolvency Act 1986, or a Scheme of Arrangement under the Companies Acts to be acceptable exit routes. …”

Appendix IIA (so far as material) provides:

“Conditions Precedent to the Transfer of League Membership

Throughout these conditions the following definitions apply:

Football Debts

any amounts owed by [ ] Football Club Limited to those creditors listed in Article 70.1 of the Articles of Association of the League and any other creditors required to be paid in full by the Football Association….

The Board in its absolute discretion should consider whether all or some of the following condition precedent to the transfer of League membership should be applied …

7.

That the Football Debts are transferred to Newco or paid in full. ”

On the administration order being made in this case against the Club, the League duly gave the Notice suspended for a period. The administrators continued trading, though lossmaking, in the hope of obtaining the necessary injection of cash to preserve the undertaking and its value or a purchaser of the assets and business of the Club as a going concern. This was done until May 2003 by means of funding provided by a shareholder who invested in excess of £20 million in the Club. In May 2003, the shareholder declined to provide further funds, and thereafter the necessary financial assistance took the form of loans made to the administrators by Inter MK Limited (“IMKL”), a company formed to bring professional football to Milton Keynes which was interested in taking over the Club. To this end IMKL has advanced to the Administrators £1.5 million to enable the Club to continue trading until the end of the football season, namely Sunday the 9^th May 2004, but it is not prepared to advance any more money. The advance enabled negotiations to proceed which have culminated in the Sale Agreement made between (1) the Club acting by the administrators (2) the administrators (3) Milton Keynes Dons Limited (“the Buyer”), a wholly owned subsidiary of the Club and (4) IMKL. Completion is a matter of urgency. There is no other prospective purchaser or source of funding.

The terms of the Sale Agreement had to reflect and do reflect the requirements to satisfy the conditions laid down in the Articles and the Policy for withdrawal of the Notice and for the transfer of the assets and business of the Club (including the Share) to the Buyer. The requirements included the payment in full of the sums due to the Football and other creditors specified, which the Club did not have the means to discharge, and the choice of a voluntary arrangement as the exit route for administration. Liquidation must be avoided at all costs, for on liquidation valuable player contracts will automatically terminate and Clause 3.3 of the Policy provides that on liquidation the Notice take immediate effect. Indeed in a liquidation there will be insufficient to pay the administrators.

The Sale Agreement is expressed to be conditional on: (1) the Arrangement being approved; (2) the transfer of the Share to the Buyer being approved by the League; (3) the League deciding not to exercise its right to compel transfer of the Share to its nominee by reason of the Club having gone into administration; (4) IMKL being satisfied that no sanction will apply to the Buyer after completion in respect of the Football Creditors or any claim by any former employee; and (5) the Club not having gone into liquidation on or before completion.

By the Sale Agreement the Club agreed to sell to the Buyer (save for the excluded assets specified in Schedule 2) its undertaking and assets (including the Share and its right to payment of monies due from the Pool Account). The excluded assets are book debts, cash in hand, cash at the bank and the lease of the training ground. The consideration for the sale is: (1) the sum of £400,000; (2) a further £400,000 if a particular planning condition is satisfied; (3) the sum lent by IMKL to keep the Club afloat totalling some £1.5 million; (4) the assumption by the Buyer of the obligation to pay and discharge to the aggregate maximum of £642,096.32: (a) all debts transferred to the Buyer under the Transfer of Undertakings (Protection of Employment) Regulations 1981 (which total some £245,259.96) (“the TUR Debts”); and (b) all Football Creditors and other debts non-payment of which entitles the League to require a transfer to its nominee of the Share for 5 pence or to refuse to withdraw the notice of withdrawal of membership (“the Priority Debts”); and (5) additional consideration payable if the football club under its new ownership is promoted to the Premier Division before or at the end of the 2006-7 season. By Clause 12.1 the Buyer agreed to pay or otherwise discharge (by way of compromise or otherwise) after completion the Priority Debts to the same maximum figure, so far as they are not paid or discharged prior to completion.

By a Share Sale Agreement of the same date and forming part of the same transaction the Club agreed to sell the entire shareholding in the Buyer to IMKL for £1.

Two weeks after execution of the Sale Agreement, on the 18^th March 2004 the Administrators convened a meeting of creditors (“the Meeting”) to approve the Arrangement, the chosen exit route from administration. It was no part of the function of the meeting to approve the Sale Agreement. The Administrators entered into the Sale Agreement on their own authority.

Under the Arrangement the funds and assets retained by the Club, after payment of the costs and expenses of administration and the costs of the Arrangement, will all be applied in payment of a dividend of 30 pence in the pound to the preferential creditors (and in particular the Revenue) and not a penny will be paid to non-preferential creditors whose debts exceed £23 million. The dividend is only possible because under the Sale Agreement, if it becomes unconditional, IMKL has agreed to treat as discharged the £1.5 million it has advanced to the administrators: if IMKL did not do so, this advance would rank as a debt charged on the Club’s assets and accordingly in priority of the Revenue’s debt and its payment would sweep the pool. It is likewise clear that, if in place of the Arrangement the Club went into liquidation, there would be nothing available to make any payment to the Revenue.

The Arrangement is on the face of it highly advantageous to the Revenue. The Revenue are content that the TUR Debts should be paid in full in priority to their preferential debt. But the Revenue take objection to the Arrangement because the Priority Debts (which in law are entitled to no preference or priority) are afforded “super-priority” and will be paid by the Buyer 100 pence in the pound whilst the Revenue, who are preferred creditors, will only receive from the administrators 30 pence in the pound.

In furtherance of this objection on this application under section 6 of the Act the Revenue challenge the Arrangement on the twin grounds that the Arrangement falls foul of section 4(4)(a) of the Act and is unfair. I am troubled that the objection in reality is to the terms of the Sale Agreement (which has not been challenged) and not the Arrangement. I shall say more on this later in this judgment. But I shall first deal with the two objections raised on the basis that the matters of complaint arise under the Arrangement.

Section 4(4)(a) of the Act provides that a meeting shall not approve a proposed voluntary arrangement under which (without the concurrence of the preferential creditors or creditor concerned) “any preferential debt of the company is to be paid otherwise than in priority to such of its debts as are not preferential debts”. It is common ground that a breach of this provision constitutes a material irregularity for the purposes of section 6 of the Act: see Peck v. Craighead [1995] BCLC 337 at 340d-h and 342g-343b. Mr Greenwood, counsel for the Revenue, submits that, reading the section exactly as it is written, the Arrangement infringes this provision, for under the Arrangement the Priority Creditors are to be paid in full whilst the Revenue is only to receive 30 pence in the pound. He argues that the section makes no express reference to the identity of the person making payment of the non-preferential debts or the source of the funds for making such payments, and that none should be implied.

In my judgment section 4(4)(a) of the Act lays down the rule that in an administration the assets of the company shall be applied in payment in full of the preferential creditors ahead of any payment to the non-preferential creditors. In so doing it mirrors the rule laid down by section 175 of the Act that in a liquidation the assets of the company shall be applied in payment in full of the preferential creditors ahead of any payment to non-preferential creditors. Neither section precludes payment of non-preferential creditors by third parties ahead of preferential creditors out of their own free money, and accordingly there can be no objection to payment by the Buyer of the Priority Debts in full. It does not matter that the non-preferential debts are paid (as they are paid in this case) to discharge the debts of the company and accordingly “on behalf of” or “at the instance of” or “for the benefit of” the company by a third party if they are paid out of his free money and at his own cost and not at the cost of the company. It would of course be different if the company put the third party in funds to do so. It would be different if the Sale Agreement were a sham or device adopted to disguise payments by the company to non-preferential creditors ahead of preferential creditors e.g. by agreeing an artificially low purchase price payable to the company for its undertaking in return for the assumption by the purchaser of an obligation to pay non-preferential creditors. That is not the case here nor has it ever been suggested to be so. The provision for payment of the Priority Debts by the Buyer is a commercial necessity for the Buyer as well as a fully disclosed ingredient of the Sale Agreement. This limitation on the application of section 4(4)(a), that it only applies where the payments are made out of the company’s assets, is in no way calculated to create a rogue’s charter, as Mr Greenwood suggests. Any arrangement of the kind in question in this case requires careful scrutiny as to its propriety and conformity with section 4(4)(a) (and indeed with fairness), but in this case the Arrangement satisfies that scrutiny.

Section 6 provides that a creditor may apply to the court for an order to revoke or suspend a decision approving a voluntary arrangement on the ground that the “voluntary arrangement unfairly prejudices the interest of [the] creditor”. The authorities establish that: (1) to constitute a good ground of challenge the unfair prejudice complained of must be caused by the terms of the arrangement itself; (2) the existence of unequal or differential treatment of creditors of the same class will not of itself constitute unfairness, but may give cause to inquire and require an explanation; (3) in determining whether or not there is unfairness, it is necessary to consider all the circumstances including, as alternatives to the arrangement proposed, not only liquidation but the possibility of a different fairer scheme; (4) depending on the circumstances, differential treatment may be necessary to ensure fairness (see Cazaly Irving Holdings Ltd v. Cancol Ltd [1996] BPIR 252 at 269-270D and Sea Voyager Maritime Inc v. Bielecki [1999] 1 All ER 4 628 at 642c-643b and 647e-g); and (I would add) (5) differential treatment may be necessary to secure the continuation of the company’s business which underlies the arrangement: (consider Business City Express Ltd [1997] BCC 826).

It is quite clear that, unless the Priority Creditors are fully paid or agree to accept less than full payment (and there is no reason to believe having regard to the strong position in which they are that they will agree to accept less and they are not obliged to do so: consider Leyland Daf v. Automotive Products [1994] 1 BCLC 245), the conditions precedent to the Agreement cannot be satisfied and the Club will have to go into liquidation. Most particularly in view of the time and financial constraints on the Club and the power of the League under the Articles the only alternatives at the time of the Sale Agreement, the Meeting and today were and are approval of the Arrangement or liquidation.

I can see no unfairness in the Arrangement so far as it provides for payment in full of the Priority Creditors by the Buyer. For the reasons which I have explained, this payment has at all times for all practical purposes been a condition precedent to any sale of the Share and the undertaking of the Club as a going concern and to any purchaser of the Club becoming a League Member. Mr Greenwood has properly conceded that he could not maintain that there would be any unfairness in the Arrangement if it did not require the Buyer to pay the Priority Debts. He has however to concede that the Club has not the means to pay them and that the Buyer must pay them if the Buyer is going to acquire the Share and become a member of the League. I cannot see how the imposition on the Buyer of an obligation to do what commercially the Buyer has to do in any event can imbue the Arrangement with any unfairness: it merely confers on the Club and its creditors the right to require the Buyer to pay and satisfy the Priority Debts and thereby to reduce the body of debtors of the Club entitled to prove under the Arrangement and accordingly to compete for a dividend if further funds become available to the Club.

It has not been suggested that the imposition of the obligation on the Buyer to pay the Priority Debts reduced the consideration payable by the Buyer and accordingly available for dividend to the Revenue. There has been no complaint about the terms of the Agreement for Sale.

In a word the payment of the Priority Debts by the Buyer removes what must otherwise be an irremovable obstacle to a beneficial sale and realisation. The power of the League to impose the obstacle and secure full payment for creditors of its choice may be objectionable and indeed the All Party Parliamentary Group in its First Inquiry Report has found it objectionable and recommended its abolition. But the obstacle exists, by common consent is legal and has to be surmounted, and it has been surmounted in the only way that it could.

The question of fairness of the Arrangement requires consideration of all the circumstances and in particular the alternatives available and the practical consequences of a decision to confirm or reject the Arrangement. In my judgment the only practicable course available to the administrators was to enter into the Agreement and proceed with the Scheme. The alternative advocated by the Revenue, in their single minded pursuit of their principled objection to the payment in full of the Priority Debts, can only bring down the whole edifice and secure a nil return for all concerned.

I therefore hold that there is no such unfairness as contended for by the Revenue.

Section 6 confers on the court, where it is satisfied that the grounds for the application are satisfied, a discretion whether to grant relief. Even if I was satisfied that any grounds existed, I would in my discretion refuse relief. To grant relief would be damaging to the Club, the Buyer, IMKL and the Administrators personally in respect of payment of their remuneration and expenses for no practical purpose, and secure no benefit for the Revenue. The Revenue’s concern is to ensure that companies do not pursue arrangements designed to defeat the preferential claims of the Revenue and payment to the Revenue of what is due. Nothing in this judgment can or should be taken as encouragement for any such arrangement. Indeed, as I have already said, any arrangement which is calculated to have this effect requires close scrutiny, and there are ample legal means to ensure that effective action is taken against those whose schemes do not survive that scrutiny.

In my view, the real objection of the Revenue, as I have indicated earlier, lies in the terms of the Sale Agreement and not the terms of the Arrangement. It is under the terms of the Sale Agreement that the responsibility to pay the Priority Debts was passed to the Buyer. But this was inevitable. As a practical matter the Sale Agreement had to make provision for payment of the Priority Debts. The administrators did not have the funds to pay them even if legally (notwithstanding section 4(4)(a) of the Act) they could have done so. There was no alternative to passing the obligation to pay to the Buyer if any beneficial realisation of the Club’s assets was to be achieved for the benefit of creditors. I can see no possible complaint about the terms of the Sale Agreement, and nor apparently have the Revenue who have not sought to challenge it. Once the Sale Agreement was entered into and so long as it stands, the available assets of the Club were such that the Arrangement could only provide (as it did) for payment of 30 pence in the pound to the Revenue compared with the likely full payment of the Priority Debts by the Buyer. Looked at this way, as I think that it should be, there can be no basis for any possible objection to the Arrangement.

I accordingly dismiss the Revenue’s application.